All Forum Posts by: Bill F.

I like @Justin R. quick rule of thumb. But I'm a finance nerd and couldn't leave well enough alone. 

@Jared Rine's intuition is 100% spot on. You break even Year 1 buying the loan down 1%. Buying it down 2% breaks even somewhere in year 2-3. 

If you plan on holding it longer than three years, buy the note down 2%. 

Here is the math for any excel nerds out there:

@Jim K.

I think a lot of the posts here make the mistake of not truly understanding that the GFC actually wasn't a RE bubble, but a RE debt bubble that had second and third order impacts on RE, and forget the fundamental truth that all RE is local. That's how we these posts in which people see the ghosts of markets past at every turn. We ignore Twain at our own peril by not remembering his maxim that history doesn't repeat itself, but it rhythms. Look at the chart below. Each of those cities had a vastly different ride from 2000 to now yet somehow get lumped into the "RE market". I'd even argue that looking at the MSA level is too macro. But that's one man's opinion. 

To answer our questions, what I would look out for would depend on my location and strategy. If I owned a bunch of Class A SFRs in the Bay Area, I'd be worried about WFH/remote work making it more normalized to not have to live in CA to get that tech pay and avoid the CA taxes. If had your strategy and did B- rentals to working class folks, I'd have my eye on inflation and how that was eating into the pay checks of my tenants and those ramifications. 

Not sure what you mean by end of the road, but if you mean, what would cause me to stop investing in RE and invest new money in other areas, well that time has already come and gone. Since COVID started I have trimmed my RE holdings and moved funds to equities. Partly due to the high RE valuations gave me excellent returns, the froth in the RE market made new deals not pencil, and the opportunities in stocks have been too good to pass up both from a pure return point of view and a return on time point of view. 

Does that mean I'll never buy more RE. Of course not. But sometimes you got to fish where the fish are. 

@Chris Orlob

You can think about investing in RE as a small business owner a few ways, but the one that makes the most sense to me is opportunity cost of capital.

Don't get me wrong, RE has great long term wealth generation abilities and can honestly change lots of people's lives for the better in the long term. However compared to small business ownership, it just can't compete in terms of returns. Heresy on BP I know, but I have experience in both spaces and know that most RE can't hold a candle to most business that do low to mid seven figures top line from a return on capital perspective. Layer on you want to do this super part time and the ask becomes even more herculean. 

That being said, if you want to take some chips off the table and get some stable uncorrelated returns, RE is great. I would explore syndications or NNN leases if I were in your shoes.

Big caveat about asking for ideas on a forum like this is you will get people who, through purely confirmation bias, think the asset class they work in is the best thing sliced bread. Take away: check posters bio and see if they make their living by selling you the thing they recommend. 

I would also be cautious about syndications from an investment perspective due to the fact that you haven't changed the amount of time you need to dedicate to the space, but rather shifted the expertise needed to make the investment. For example, instead of needing to have the knowledge, skills, and abilities to buy and run a 100 unit apartment buldings, to invest in a syndication you need to have the knowledge, skills, and abilities to vet GP's in that space. A subset of that vetting skill is understanding how to buy/run an apartment buldings with more things added on. 

Best of Luck 

@Ezra Henderson

Not stupid idea at all, but one that kinda applies a residential mindset to a commercial idea, which doesn't always work. 

LLCs get commercial loans and deal with commercial banks. The LLC will have to show historical financials and when it does that the bank will see the payments to the previous owner. They will then ask for the loan docs you signed with him and if the verbiage doesn't work for them, they could close the door because the loan you have with the owner could not allow for any debt to be senior to it and banks generally don't lend when they aren't in first position.

If they like what they see with the existing loan docs, then it will come down to Debt Service Coverage Ratio of the business to determine what LTV you can go to on the loan. DSCR is how much the bank wants left over after paying all operational expenses.

In your example, lets say your million dollars worth of properties met the 1% rule and throw off $120K/yr. Running a 40% expense ratio you have $72k in gross profit. Banks DSCRs sit between 1.2-1.5 and means you can make between $48-60k of debt payments per year. For the sake of argument lets say that apply that DSCR to your all your debt payments. You pay ~$84k/yr on the seller debt, so you've blown way past your DSCR and the bank won't do the loan, at least in this case. Most of this stems from the fact that you went 100% LTV on the seller note so the ying to the yang of putting no money down is that you get little cash flow in the first few years.

Now what about buying more properties to increase the cash flow? This gets into a chicken or the egg situation since in your example you want to pull the cash out and use it to buy properties, but the bank won't let you do that since you don't have enough existing cash flow to cover loan payment but without the loan you can't buy anything. 

Short answer is you can't pull the money out and go on a RE shopping spree. Long answer, if you find a property you want to buy, you could also pledge cash flow from your existing 10 units to the loan to help make the DSCR on that asset meet the bank's needs.

@Matt M.

I think the basic premise of this deal is the old 'you name the price, I name the terms' They are selling you a bill of goods when they say the purchase price is $300k. That ignores the time value of money. 

As others have pointed out, their play is to get into this deal for zero cash down, which makes any amount of profit have the mystical infinite CoC. Plus they are screwing you on the $200k in 8 years. That assumes the house will appercaite at less than 2%/yr with they given inflation, at first guess seems low, but you are in the market so that could be wrong.

I made a toy model that says their deal could work, if they have a low cost of debt and high leverage and the stars align. Not a great business model by any means, but smarter ppl have done dumber things. That's my guess. I think @Rhett Kelton is also onto something with the hedge fund idea. If they roll up a bunch of these they could sell them as a bundle for a way higher per unit price than as a single unit. 

One question, when do you pay off your commercial loan? 

 Not to mention that Nathan's assets could have declined in value, but since they aren't market to market every day like stocks, he never knew. 

Also most of the tax savings only exist bc Nathan is a full time RE Professional. For everyone else the "savings" are more loans since depreciation capture happens at sale. 

Classic Stocks vs RE apples to oranges. 

To answer OP's original question, which I really like because it gets at an under appreciated aspect of RE investing not talked about here on BP; Rent Growth. 

The beauty of an investment like RE is that a significant portion of the costs are fixed [mortgage payments] so when the market rent goes up, a large part of every dollar increase flows right to the bottom line. 

Market dependent of course, but for every 1% in rent growth you will see a 2-4% increase in your bottom line cash flow. 

Over ten years that can take you from $100/door/month to $300/door/month over ten years with 3% rent growth. 

 Yea that's what I meant, sorry for being imprecise. 

I think I'd be interesting to see the number of new units that have come into the market over the same time period. Though IDK if limiting the scope of the analysis to buldings with <10 units is the best since I'm not sure that when a customer goes looking for a place to rent they think about the market in that way. I could be wrong, but I'd assume  they care more about location, bed rooms, bathrooms, rental rate, parking, ect. That would open the new unit scope up to any MF, so 5+ units. 

Would love to hear your thoughts on that. 

@Ethan M.

My opinion is contrary to the general feeling on BP, but I think rent growth is under-appreciated in these forums while day 1 cash flow is over sold. 

The fact of the matter is that rent growth and appreciation are highly correlated, which makes sense from a supply and demand perspective. I looked at some data BP put out a while ago and actually having a high degree of day 1 cash flow was a predicator of low/negative total return for SFRs. 

Looking at BLS Rent growth for the past 20 years, shows that its averaged out to about 5% over the US. Now that's only so useful since RE is local, local, local and past performace isn't a guarantee of future results, but it is a starting point. 

At the end of the day it depends on what your goals and objectives are for RE investing, but long term wealth generation comes from appreciation and amortization. Given those facts you have to look carefully at the assumptions that underpin the rental growth assumptions.  

@Jonathan Bombaci

Great stuff, as a current corporate finance nerd I too find this fascinating. I can only imagine how difficult it was to compile all this data, but it looks great. 

Not to add more work, but it would be interesting to see the listings compared to multi family building permits over the same time period in order to get some more insights into the drivers of absorption rates.  

@Blake Ramsey no single metric always has an edge over others. It is entirely situation dependent. Investing in stabilized A class apartment building that you plan to hold for decades requires different metrics than a speculative fix and flip you ant to sell in 8 months. 

That being said, there is a hierarchy of complexity and applicability. 

I look at how much cash I can apply to the deal. Some strategies have insane returns, but take a few thousand dollars in capital and, at least for me, the juice simply isn't worth the squeeze from an absolute dollar return perspective. 

Like @Joe Villeneuve, I start with payback period. If it like 400 years or some absurd number, I move on. 

Then I look at ROA and ROE to get a feeling for how good the asset is at producing cash flow currently and how much the available financing options change the return. 

Then I'd move on to looking at the magnitude of appreciation using CAGR. 

Finally if it looks good then its time to model out the cash flows over the life of the project and apply either a NPV and IRR/MIRR to the deal.

Once I have the model, then I like to see what proportion of returns come from cash flow, appreciation, tax savings, and debt pay down to get a sense of how sensitive the asset is to changes in assumptions.